Market Insight


Helicopter Money or Nation Building
Wednesday, May 11, 2016


According to the World Economic Forum, “helicopter money is a reference to an idea made popular by the American economist, Milton Friedman, in 1969”. In a paper titled, “The Optimum Quantity of Money”, Friedman drew an analogy of a helicopter flying over a community and dropping $1,000 in bills from the sky, as a means of stimulating economic growth and inflation.

The basic principle is that to raise economic output and inflation, the most effective tool available to a central bank is to give money directly to everyone.

Helicopter money as a driver for economic growth

Following on from quantitative easing and the introduction of negative interest rates in much of Europe and Japan to no avail, there is now a view - and even an expectation - that helicopter money is the next tool to be deployed by the relevant central banks.

In a speech given to the Credit Suisse Global Markets Macro Conference in New York last week, Glenn Stevens, Governor of the Reserve Bank, said that monetary policy as implemented so far, has promoted portfolio substitution as intended - pushing investors to search for yield, but it has had debateable impact in pushing consumers and businesses to respond by purchasing real goods and services. 

Moreover, it is a recognition that monetary policy can only go so far that has prompted the consideration of helicopter money. If implemented, helicopter money would be a use of fiscal policy or fiscal and monetary policy combined.

It would effectively be a transfer of money from government to individuals. And if initiated, could be very difficult to stop.

It is also an economic taboo and illegal in some countries. Stevens asked, are we that desperate?

Forces driving down returns to savers
Writing in the Financial Times recently, economics columnist, Martin Wolf, argued that the world is suffering from a glut of savings relative to investment opportunities. Monetary policy is not responsible for negative interest rates but merely reflects the economic reality that market forces are driving down returns to savers – their money is worth very little.

Weak private investment, reductions in public investment, slowing growth in productivity and huge debt both public and private, have interacted to lower the real equilibrium interest rate, and as a result, nominal interest rates too.

Stevens acknowledged this point in his speech, noting that we have to face up to the question of whether trend growth is lower and if so, what can be done. He is one of the few to observe that demographics may be a contributing factor to lower trend growth - the ageing population is contributing to the trend. And if we don’t want to do anything about this, we will have to accept a low growth future and lifestyles that will be less than expected.

There is some evidence that this acceptance is already underway.

A plausible alternative
If we don’t want to accept this future, then action needs to be taken to address growth impediments such as undercapitalised banks, over leveraged households and businesses, to provide incentives for risk taking of the right kind, and to remove practices that impede productivity and the re-allocation of capital.

Stevens argued that we are not that desperate that the use of helicopter money should be seriously considered. For many governments there must still be infrastructure projects that can be funded through bond issuance and which will produce returns comfortably above their cost of funding.

Recent talk of building very high speed rail links along the eastern seaboard of Australia comes to mind. Surely, if there was a time for this long held pipe dream to become a reality, now is the time.

The cost of such a nation building project that will provide social and economic dividends well beyond anything that the NBN will achieve, and which should rank with the Snowy Mountains Scheme, will never be lower.

Philip Bayley
Philip is the Principal of ADCM Services, publisher of The DCM Review an independent online commentary, analysis and data on Australia & New Zealand's debt capital markets. He is also a contributing editor to Banking Day and a director at Australia Ratings.


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